As you approach retirement, you must make many decisions, including where to live, how to manage healthcare costs, and what you'd like to spend your golden years doing. However, one of the more pressing decisions is when to claim Social Security retirement benefits. Social Security plays a key role in many people's retirement finances, so deciding when to claim shouldn't be glossed over.
You can claim retirement benefits as early as age 62, at your full retirement age (FRA), or delay them until you reach 70, but each has different implications. Claiming benefits before your FRA will reduce your monthly benefit; delaying them past your FRA will increase it.
Many people find the idea of higher Social Security monthly benefits enticing, but in the grand scheme, I believe it can be overrated. Let's take a look at why.
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Your full retirement age plays an important role in Social Security
Many aspects of Social Security revolve around your FRA because it's when you're eligible to receive your primary insurance amount (PIA). You can think of your PIA as the baseline benefit that Social Security uses to determine your monthly payout based on when you claim. Below are FRAs by birth year:
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If you claim benefits within 36 months of your FRA, they are reduced by five-ninths of 1% monthly. Any additional month reduces them by five-twelfths of 1% monthly. For those whose FRA is 67, this works out to benefits being reduced by 20% if you claim at 64 and 30% if you claim at 62.
If you claim benefits after your FRA, benefits are increased by two-thirds of 1% monthly, or 8% annually, until you turn 70. For those whose FRA is 67, this works out to benefits being increased by around 24% by delaying until 70.
Look past the increased benefits and consider...
Increased monthly benefits are appealing, but it's important to keep things in perspective and look at the bigger picture starting with your break-even age. Your break-even age is when the total amount of benefits received from claiming at one age equals that of another. Knowing this age is useful because it can help you decide if delaying for increased monthly benefits is worth the wait.
As an example, let's imagine someone's monthly benefit is $1,000 at their FRA. This means delaying benefits until 70 would increase their monthly payout to $1,240.
At age 80, someone who claimed benefits at 67 would have received $156,000 total; someone who claimed at 70 would've received $148,800. At age 82.5, someone claiming at 67 or 70 would've both received $186,000 in total benefits, making 82.5 their break-even age.
With that in mind, let's examine life expectancies at certain ages, according to Social Security:
| Age | Men's Life Expectancy | Women's Life Expectancy |
|---|---|---|
| 62 | 81.03 | 84.04 |
| 67 | 82.58 | 85.10 |
| 70 | 83.59 | 85.82 |
Source: Social Security Administration. Life expectancy figures refer to the expected age at death.
Comparing men's life expectancy at 67 and 70 compared to their break-even age between claiming at 67 and 70 shows that it's similar. Women's life expectancies give them a bit more wiggle room, but it's still within a couple of years of each other. Considering that, the question becomes: Is missing 36 months' worth of payments worth the delay?
There is no cookie-cutter approach to when to claim
Although I think delaying Social Security payments can be overrated, I must stress that there's no one-answer-fits-all regarding when someone should claim. There is no right or wrong time, just the time that works best for you. Everybody's situation is different and requires them to consider various factors.
For example, someone with health issues may want to claim benefits as soon as possible because of uncertainty. Someone with a nice nest egg may delay benefits simply because they won't be relying heavily on Social Security for their retirement income.
It's recommended to take a holistic approach when deciding when to claim. Consider your personal and family health, retirement savings, current financial situation, retirement goals, and other relevant factors. Most importantly, you want to make a decision you're comfortable making.
